Daily Market Data Dump: Tuesday

Takeaway:A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products.

Hawkish, Dovish, Hawkish, Dovish

Client Talking Points

USD

And… the buy signal – in US Dollar being immediate-term TRADE oversold at 93.62 on the USD Index with an immediate-term range of 93.62-95.48 and a EUR/USD risk range of 1.10-1.14. Good spot to raise cash (again) in USD.

Europe

Big mean reversion move higher this morning for European Equities (which got hammered again last week); Italian stocks leading +1.8% on the MIB Index (after falling another -3.8% last week to -19% YTD); that’s helping US Equity futures, but #EuropeSlowing is not (yet) the latest bull case for US stocks.

Asset Allocation

CASH

US EQUITIES

INTL EQUITIES

COMMODITIES

FIXED INCOME

INTL CURRENCIES

6/6/16

76%

0%

0%

6%

12%

6%

6/7/16

74%

0%

0%

4%

14%

8%

Asset Allocation as a % of Max Preferred Exposure

CASH

US EQUITIES

INTL EQUITIES

COMMODITIES

FIXED INCOME

INTL CURRENCIES

6/6/16

76%

0%

0%

18%

36%

18%

6/7/16

74%

0%

0%

12%

42%

24%

The maximum preferred exposure for cash is 100%.
The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company

Ticker

Sector

Duration

MCD

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle.

Three for the Road

TWEET OF THE DAY

QUOTE OF THE DAY

“I don’t believe in luck, I believe in preparation.”

-Bobby Knight

STAT OF THE DAY

Ted Williams had a career batting avergage of .344 with 521 home runs.

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The Macro Show with Keith McCullough and Jonathan Casteleyn Replay | June 7, 2016

CHART OF THE DAY: Breaking Down The Cycle's Toughest Earnings Growth Comps

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

"... And that’s really the point on raising Cash. I have no problem buying stocks when they are on sale. But when they are at the top-end of my current SP500 risk range (2049-2116) AND the latest bull case is one of the easiest yet to refute, I get out.

As you can see in today’s Chart of The Day (slide 35 in our Q2 Macro Themes Deck) the toughest comps (comparative period) for #LateCycle Sector Earnings Growth is the 2nd quarter. That’s because Q2 of 2015 was the peak."

Changes vs. Levels

That’s a great Behavioral Economics quote from Richard Thaler in an excellent chapter of Misbehaving that he called Value Theory. “They can be changes from the status quo or changes from what was expected, but whatever form they take it is changes that make us happy or miserable.”

In that same chapter, Thaler shows what most rate-of-change macro analysts will recognize as an S-curve. Yes, “people like gains… but they hate losses more…” and that’s a critical lesson every portfolio manager should learn earlier in his or her career than later.

“Kahneman and Tversky recognized that we had to change our focus from levels of wealth to changes in wealth. This may sound like a subtle tweak but switching the focus to changes as opposed to levels is a radical move” (pg 30).

Back to the Global Macro Grind…

The further you get from academia (and the closer you get to how real money is managed), the faster you’ll realize that using linear econ/valuation models generally don’t work. If you can get ahead of a rate of change move however, you might generate alpha.

No, generating alpha (or excess returns on capital) in any industry that is oversupplied (like the money management business has become) is not easy. That’s why we have to constantly evaluate and evolve our #process. As the game changes, we should.

But at what point do we start trying to change what it is that we do for the sake of very short-term change in market prices that we were not positioned for? Do we capitulate? Do we chase?

I’m on the road in Baltimore, Pittsburgh, and Minneapolis this week and I can guarantee you that in a significant percentage of my meetings at least one person will say “but the market is back to flat.”

Then, as I’m accustomed to answering with a question, I’ll say “what market do you mean, the SP500?” Because, of course, macro markets (stocks, bonds, currencies, etc.) have been far from flat as markets started pricing in #TheCycle going back to late 2014.

Sure, you can just sit there at your desk and complain that “this market won’t go down”…

Or you can be long the things that have actually gone up. Amidst crashes and draw-downs in asset classes around the world, the 1yr return (June to June) in the Long Bond has been double digits.

So, from a rate of change perspective, with the US 10yr at 1.73%, SP500 at 2109, and CRB Index at 192, where to from here? What’s going to be the best place to avoid losses?

CASH – yep, good ole fashioned world reserve currency style – I say the US Dollar

Nope, from these macro market prices (now that Gold and Utilities are +15-17% YTD), there really isn’t anything that beats raising CASH for this pending period of the employment, consumption, and #ProfitCycle slowing.

Slowing? I thought the Old Wall said the call that they didn’t make (before earnings slowed) is done slowing?

Yep, if I don’t hear that 3x per day on the road for the next 3 days, I will be shocked. You see, the way this works is that the sell-side’s perma bull strategists do the rounds too. And I spend a fair amount of time auditing their ever-changing reasons to “buy stocks.”

And that’s really the point on raising Cash. I have no problem buying stocks when they are on sale. But when they are at the top-end of my current SP500 risk range (2049-2116) AND the latest bull case is one of the easiest yet to refute, I get out.

As you can see in today’s Chart of The Day (slide 35 in our Q2 Macro Themes Deck) the toughest comps (comparative period) for #LateCycle Sector Earnings Growth is the 2nd quarter. That’s because Q2 of 2015 was the peak.

No, I’m not talking about Energy and Industrials (which, by the way, we don’t see consensus “backing out” of the “but the market is flat” comment do we?)….

I’m talking about the mainline of the US economy: Consumption, Employment, Financials, Healthcare, Tech, etc. And oh is that going to look slow, in rate of change terms, by the time late summer hits (Q2 reports).

At a level, do I care? Sure, but only if the rate of change in profit growth goes positive. No macro man worth his #timestamped t-shirt makes BUY/SELL calls based on a “valuation” model.

“Ex-Energy” (lol), we’re about to see the biggest rate of change slow-down (year-over-year) of #TheCycle. Give this macro market a few months to noodle over that and we’ll see if I was right to raise Cash in June.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.69-1.81%

SPX 2049-2116 RUT 1115-1183

VIX 12.99-16.84 USD 93.62-95.48 Oil (WTI) 47.36-49.99

Gold 1

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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